'Oil chief paid $1m to warlord ' was wrong to say that Robin Cook, when Foreign Secretary, had helped British businessman Kaveh Moussavi obtain 'confidential documents' from a Bermuda-based company. The documents were not confidential, but the audited accounts of Berry Trade (Bermuda) which had not been released to a major shareholder of the company who was entitled to see them

A British oil company which once employed senior Tory Alan Duncan as a consultant paid $1 million to the Serbian war criminal Arkan to settle a score over a secret oil deal to supply Slobodan Milosevic's Serbia with fuel.

An investigation by The Observer has established that millionaire oil trader Bob Finch, director of Vitol, based in Knightsbridge, London, used Arkan as a 'fixer' after a controversial oil deal in the former Yugoslavia collapsed.

Documents obtained by The Observer reveal that in 1995 Vitol signed a deal with a Serbian company, Orion, to sell thousands of tonnes of oil to the former Yugoslavia.

The deal was struck with Belgrade-based businessman Zveto Dragovic in June 1995 while the Bosnian conflict was still raging and UN sanctions were in place. Vitol insists the oil was delivered only after sanctions were suspended and the deal was therefore entirely legal.

Only weeks after the deal was struck Serb forces walked into the United Nations 'safe area' of Srebrenica and led 6,000 Bosnian Muslims to their deaths.

The UN-imposed sanctions in 1992 made it illegal to supply oil to Serbia. These were suspended at the end of November 1995 after the Dayton peace accords were signed. Dragovic claims that, after sanctions were lifted, Vitol cut him out of the deal and began dealing directly with the Yugoslav state oil company, Yugopetrol.

As a result, in February 1996 he took the company to court in Belgrade and won the right to seize 8,000 tonnes of Vitol's oil stored at the Novi Sad refinery north of the Serbian capital. Vitol never accepted the decision of the Yugoslav courts and in April 1996 Finch, head of trading at Vitol, flew to Belgrade to retrieve $2 million for the oil supplied to the middleman.

The Observer has established that Vitol used Arkan to 'persuade' Dragovic to pay up. Contacts in Serbia set up a meeting at Arkan's house on 10 April 1996 attended by Finch, Dragovic and Arkan and his henchmen. As a result Dragovic signed a new agreement to set aside the court decision. As a reward for his services, Arkan demanded a $1 million fee.

Faced with the evidence, Finch and other senior executives at Vitol have confirmed their dealings with Arkan, who was assassinated last year in a hail of bullets in a Belgrade hotel lobby.

Speaking at Vitol's HQ, Finch said: 'I have met Arkan once... It does not look good, I agree.'

Asked how he was introduced to the former bank robber, who was known at the time to have committed atrocities in Croatia and Bosnia, Finch said: 'We do have local people in Belgrade... They said, "Go there. Meet the man. It can be sorted out." And, to be honest, it was sorted.'

Although it was not until 1997 Arkan was indicted by the UN war crimes tribunal in The Hague for crimes against humanity, his brutality was well documented when Finch met him in 1995.

His band of paramilitaries, the Tigers, were the most feared unit of the Serbian murder machine. He was known as the butcher of Vukovar after ordering the shooting in cold blood of 250 patients and staff his unit had taken from a hospital.

By April 1996, Arkan had become one of Serbia's richest men after amassing a fortune from the currency black market, arms dealing and oil smuggling.

Vitol's involvement with Arkan came to light as a result of a £122 million court case involving a controversial oil deal in Iran. British businessman Kaveh Moussavi accuses Vitol of cutting him out of a deal to transport millions of gallons of oil from the Caspian Sea in the north of the country to the Gulf in the south.

Although the legal battle between Moussavi and Vitol has so far been the talk only of the oil industry, it now threatens to spill into the world of British politics. Earlier this year Moussavi obtained the help of Robin Cook, then Foreign Secretary, to obtain confidential documents that would help in his court case against Vitol.

After receiving a letter from fellow Cabinet Minister Andrew Smith on Moussavi's behalf, Cook wrote to the financial authorities in Bermuda demanding information on Berry Trade, created by Vitol and Moussavi to deal in Iran.

Six days after getting Cook's letter, the Bermudan authorities released information revealing that Vitol had received a $3 million insurance payment for oil that went missing in Iran. Moussavi alleges the claim was fraudulent, something Vitol denies and will contest in court.

The other senior politician being dragged into the action is the Tory, Alan Duncan, whom Moussavi intends to call as a witness. Duncan, former Tory vice-chairman and a supporter of Michael Portillo, was a paid consultant to Vitol in the early 1990s. He worked with Vitol's president, Ian Taylor, at Shell and remains a close friend.

Duncan, a millionaire, made part of his fortune by brokering a deal between Vitol and Pakistan during the Gulf war. Duncan's company, Harcourt Consultants, continued to do work for Vitol in Pakistan until four years ago.

Moussavi said: 'It is was well known within Vitol how important Duncan was, particularly in Pakistan. I want him as a senior political figure to come to court and explain on oath how the company goes about its business.'

There is no suggestion that Duncan knew about, or was involved in, any deal with Serbia or Iran, and he is furious that Moussavi is determined to drag his name into the court action.

Speaking to The Observer, Duncan said: 'Vitol is a well-respected oil-trading company. I am irrelevant to any dispute they may have with someone else.'

A spokesman for Vitol last night said: 'Mr Moussavi is determined to blow up a small business dispute into a major political row. We are not prepared to play his game. We do not believe any of his allegations of wrongdoing have any foundation and will vigorously contest his wild accusations in court.'